22/9/215 Nickel Market Outlook Stuart Harshaw
This presentation may include statements that present Vale's expectations about future events or results. All statements, when based upon expectations about the future and not on historical facts, involve various risks and uncertainties. Vale cannot guarantee that such statements will prove correct. These risks and uncertainties include factors related to the following: (a) the countries where we operate, especially Brazil and Canada; (b) the global economy; (c) the capital markets; (d) the mining and metals prices and their dependence on global industrial production, which is cyclical by nature; and (e) global competition in the markets in which Vale operates. To obtain further information on factors that may lead to results different from those forecast by Vale, please consult the reports Vale files with the U.S. Securities and Exchange Commission (SEC), the Brazilian Comissão de Valores Mobiliários (CVM), the French Autorité des Marchés Financiers (AMF) and The Stock Exchange of Hong Kong Limited, and in particular the factors discussed under Forward-Looking Statements and Risk Factors in Vale s annual report on Form 2-F. isclaimer
Nickel prices have declined to the depths of the 29 financial crisis. Exchange inventories have stabilized in recent months Exchange Stocks (metric tonnes) 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, Nickel cash price and stocks Jan 28 Sep 18 215 LME Cash Price (USD/mt) $35, $3, $25, $2, $15, $1, 28 29 21 211 212 213 214 215 $5, Source: Bloomberg
Prices are now as deep into the cost curve as they have been at any time over the past 25 years USD/t 55, 5, 45, 4, Monthly Average LME Price C1* Cost at 9th Centile C1* Cost at 75th Centile C1* Cost at 5th Centile Nickel price & cost curve (1992-215) 35, 3, 25, Indonesian ore ban 2, 15, 1, 5, Russian nickel enters Western market Asian financial crisis 21 Recession 1993 1995 1997 1999 21 23 25 27 29 211 213 215 Source: Wood Mackenzie, Vale analysis * Net Direct Cash Cost (C1) before capital less net by-product credits Global financial crisis 6% of production is now losing money
Nickel tends to be one of the more volatile base metals, overreacting on both the down and upsides 25% 2% 15% Daily change in nickel prices (1989-215) % daily change: Nickel Volatility ( 89-15) Standard deviation Nickel = 2.2% Zinc = 1.7% Copper = 1.7% Aluminum = 1.4% 1% 5% % 1989 1991 1993 1995 1997 1999 21 23 25 27 29 211 213 215-5% -1% -15% Source: LME, Vale analysis 4
Despite the negative sentiment, nickel demand continues to remain firm Mt 11 1 9 8 7 6 5 4 3 2 1 9.61 4.58 5.3 213 Q1 World stainless production 9.44 4.59 4.85 213 Q2 Source: CRU 9.6 5.4 4.57 213 Q3 1.95 1.98 1.68 1.66 1.63 1.23 1.43 1.18 5.24 4.99 213 Q4 5.3 5.38 214 Q1 5.55 5.4 214 Q2 5.44 4.99 214 Q3 5.38 4.8 214 Q4 5.32 5.34 215 Q1 5.58 5.4 215 Q2 5.53 5.1 215 Q3f China RoW China Over-capacity in China as producers struggle to maintain market share Prices/margins remain under pressure Concern over Chinese end use demand is key headwind for nickel market Europe End use demand reported to be steady, but cautious given falling nickel prices US Oversupply with ramp-up of new capacity and increased competition from imports Non-stainless markets Aerospace and medical remain good Weakness in energy and mining
What similarities does an iceberg have with the nickel market? Just over 1% of an iceberg is typically above water
Only 14% of nickel supply is typically delivered to the LME. The non- LME deliverable segments have been showing improvement 1 pct Global Nickel Supply and current trends (percent of world supply) 2/3rds of world nickel supply can t be delivered to the LME and in these markets we are seeing improvement 14 8 6 4 2 Scrap market has tightened in Europe with prices improving from low 7% to mid 8% of contained metal 3 13 Production falling yearover-year as ore availability tightens. Record imports into China combined with smaller discounts 16 8 Discounts improving in China for non-deliverable units 19 Weakness in oil & gas and mining having negative impact on non-ferrous alloys Commodity LME deliverable nickel will be least desired by stainless mills as they focus on cheaper options first. This means LME inventories will lag any nickel market improvement Stainless Steel Scrap FeNi Nickel Pig Iron Non-Deliverable finished nickel Higher Purity LME Deliverable "Commodity" LME Deliverable source: 214, Vale Analysis
Chinese imports of FeNi and refined nickel have increased to record levels Highest level of Chinese net imports in Q2 reflecting an end to de-stocking and slowing NPI 3 series production in China gaining market share helping to support nickel demand despite low top-level stainless production growth Low nickel prices and high cost structure of 8-13% FeNi, encouraging stainless mills to consume 2-3%NPI with cathode Contained Ni (kt) 65 6 55 5 45 4 35 3 25 Chinese Monthly Refined and FeNi Imports Refined Imports FeNi Imports New SHFE contract and delivery of Norilsk nickel may also partially explain high levels of cathode imports 2 15 1 Imports anticipated to remain at strong levels; impact of rainy season to help support 5 29 21 211 212 213 214 215 8 Nickel Market Update Customer Presentation August 215 Source: GTIS
We believe the increase in Chinese net imports largely reflects end use requirements with continued de-stocking in Q1 offset by restocking in June/July kt 1,2 Estimated Chinese Nickel Consumption kt 4 Chinese net nickel imports (imports exports) +251% 1, 8 Assumed 3% consumption growth From nickel stocks and/or net imports Chinese Production (excl. NPI) Chinese NPI production ~4kt 3 Net imports Annualized 6 2 4 1 Jan - July 2 Share of world consumption 215f 214 213 212 211 21 29 28 27 26 19% 52% 26 27 28 29 21 211 212 213 214 215YTD Source: Vale Analysis Source: GTIS, Vale Analysis
While Filipino nickel ore shipments have largely tracked 214 levels, advanced data suggests that ore imports will drop off much earlier this year 13 12 11 1 9 8 7 6 5 4 3 2 1 Monthly Distribution of Philippine Ore Exports in last 5 years % of annual amount Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Source: GTIS, Vale Analysis Jul 38 36 34 32 3 28 26 24 22 2 18 16 14 12 1 8 6 4 2 Vessels Arriving to the Philippines # of Vessels 5 1 15 2 25 3 35 4 45 5 55 Source: nieba Week of the Year 214 215
Given extremely low prices, the market appears to be pricing in a no growth scenario China Demand Scenarios CRU forecast 5% of growth in China No growth in China Nickel supply/demand balance 74 Note does not include any potential supply side shutdowns due to current price environment 14 8 Market sentiment 38 16 26-4 Analyst expectations -47-43 -53 215f 216 217 218 Source: CRU, Vale analysis
Even in a weak demand scenario, we see existing prices as unsustainably low Market Balance (China growth scenarios) versus negative cash flow production 1,15 CRU forecast 5% growth in China No growth in China 38 16 74 26 14-47 -4-43 -53 216 217 218 Amount of Production that is Cash Flow Negative Today Source: CRU, Vale analysis
Further, we remain optimistic that nickel demand will see support. The steep drop in prices could help incent increased usage in applications where substitution has occurred CAGR (%) World metal demand growth (198-214) 198-2 2-214 6 +3.1% Change in CAGR 5 4 +3.% +.2% 3 +1.% +.2% 2 1 Aluminum Lead Zinc Copper Nickel* -14 $1,95 $1,5 $1,75 $5,175 $16,75 Spot $1,6 $1,675 $1,675 $5,275 $9,65 13 * 198-2 nickel CAGR excludes Russian demand Source: Macquarie, Vale analysis
Key conclusions Nickel prices have fallen to extremely low levels during the typically slower summer months on negative sentiment towards the Chinese economy and associated demand for stainless steel. Prices now at levels where more than half of nickel production is losing money. This is an extreme price level even in an environment of slowing demand. Nickel imports into China have reached historical peaks, imports are anticipated to remain at high levels as NPI production declines. While the timing of a market upturn will be impacted by Chinese demand growth, the longer-term dynamics remain positive Scarcity of sulphides and high grade saprolite for nickel Strained company financial positions to slow supply development Lower prices may help to support demand growth